Joseph E. Stiglitz, recipient of the Nobel Memorial Prize in Economic Sciences in 2001 and the John Bates Clark Medal in 1979, is University Professor at Columbia University, Co-Chair of the High-Level Expert Group on the Measurement of Economic Performance and Social Progress at the OECD, and Chief… read more

A Better Economic Plan for Japan

NEW YORK – It’s been a quarter-century since Japan’s asset bubble burst – and a quarter-century of malaise as one “lost decade” has followed another. Some of the criticism of its economic policies is unwarranted. Growth is not an objective in itself; we should be concerned with standards of living. Japan is ahead of the curve in curbing population growth, and productivity has been increasing. Growth in output per working-age person, especially since 2008, has been higher than in the United States, and much higher than in Europe.

Still, the Japanese believe they can do better. I agree. Japan has problems on both the supply and the demand side, and in both the real economy and finance. To address them, it needs an economic program that is more likely to work than the measures policymakers have recently adopted – and which have failed to achieve their inflation target, restore confidence, or boost growth to the level desired.

For starters, a large carbon tax, if accompanied by “green finance,” would stimulate enormous investment to retrofit the economy. Almost surely, this stimulus would exceed the contractionary effect of money being taken out of the system and the negative wealth effect of the decreased value of “carbon assets.” The adverse wealth effect from the decrease in the value of carbon assets would be small; and, with the capital stock badly out of sync with the new price system, the investment unleashed would be large, unless there were bottlenecks in closing the gap.

In that case, the money generated by the tax could be used to reduce government debt; otherwise, it could be used to finance investments in technology and education – including supply-side measures to improve the productivity of Japan’s service sector. These expenditures could simultaneously stimulate the economy in ways that would finally pull it out of deflation.

Many outsiders worry about Japan’s debt, which is easy to service at the low interest rates prevailing today, but would not be if rates increased to more normal levels. While I don’t see that happening anytime soon, Japan could undertake two policies to inoculate itself against such concerns.

First, it could exchange some of its debt for perpetuities, bonds that are never repaid, but pay a (small) interest rate each year. This would shift the risk entirely off the government’s books. Some might worry that this would be inflationary; but in Japan’s upside-down economy, inflation is exactly what’s needed. I believe worries about a sudden increase in interest rates are greatly overblown; but, out of an abundance of caution, the government could exchange say 5% of its debt every year, unless and until excessive inflationary pressures appeared.

Alternatively, the government could exchange the debt for non-interest bearing money – the long-feared monetization of government debt. Even if monetary finance was more likely to boost inflation than the exchange of debt for interest-bearing perpetuities, this is hardly an argument against it: it is only an argument for going more slowly.

The second way Japan could protect itself from an interest-rate spike starts from the recognition that a large share of the money the government owes it owes to itself. Many on Wall Street don’t seem to understand that what matters is the net debt – what the government owes to the rest of society. If the government repaid the money it owes to itself – netting it out, in effect – no one would know the difference. But those on Wall Street who look only at the headline debt-to-GDP ratio would suddenly feel better about Japan.

If after all of this, there is still evidence of a lack of demand, the government could reduce its consumer taxes, increase investment tax credits, expand programs to help low- and middle-income households, or invest more in technology and education, financing all of this by issuing money. Again, old economics would worry about inflation; but Japan wants those “fears” to come true.

Japan does have more than a demand-side problem. Data on output per hour worked suggest a supply-side problem, most clearly manifested in the service sector, where the impressive ingenuity seen in so many manufacturing industries typically is nowhere in evidence. A natural niche for Japan would be technology developments in the service sector – such as the development of diagnostic instruments in the health-care industry.

Prime Minister Shinzo Abe, however, has taken a very different approach, supporting the Trans-Pacific Partnership trade deal with the US and ten other Pacific Rim countries. Abe believes that the TPP would force needed reforms in domestic agriculture (though, interestingly, no one in the US thinks it would help the US move away from its highly distortionary agricultural policies). In fact, such reforms would have a miniscule effect on GDP, simply because agriculture is a very small part of output. Nonetheless, such reforms remain desirable and provide another arena in which young Japanese could show their ingenuity (though the TPP is not the best way to bring that about).

On the other hand, Abe is right to pursue policies to integrate women more fully and equally into the labor force. If successful, such measures should provide a boost to both productivity and growth.

Even after a quarter-century of stagnation, Japan remains the world’s third-largest single economy. Policies that can help raise standards of living there will stimulate demand and growth elsewhere in the global economy. Equally important, just as it has shared its innovative goods and technologies with the world, Japan could end up exporting successful policies, with the same or similar measures increasing standards of living in other advanced countries as well.

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Comments

The fact that Japan has gone further for longer on fiscal stimulus and that monetary policy has attempted to accommodate fiscal deficits, and the results of that policy has been an "epic fail" should make us question why we would want to do the same in the U.S.? The latest Japanese policy has been to attempt a "balanced budget multiplier" by raising both government spending and taxes to pay for the incremental spending. Perhaps the Japanese policy technocrats should consider reducing the sales tax by a significant amount and let the public spend their increased take home pay as they see fit. Read more

Professor Stiglitz has a good grasp of the big picture in Japan. Everything he says makes sense. Could PS perhaps ask someone in its group of economists to write a similar essay about how to fix the US economy, something as brief and with the same plain language? Read more

Good points, and also be careful about over-optimising to a narrow set of metrics. In Japanese culture, full employment is a goal, including finding things for older people to do to provide fulfilment and a sense of being useful in the community. These considerations are as important as GDP or productivity, but may not be captured by simple rationalist metrics.

Same for agriculture. The production of rice is a culturally significant activity because of its effect on the countryside, on communities, and the way of life. It's also a strategic concern where self-sufficiency in rice is worth much more than the marginal benefit of importing it. Japanese policy makers know these things, but may not voice them so readily. Read more

Abe's policies 'to integrate women into the economy's have so far been a lot of talk but very little real action. He has asked corporations to hire, promote more women but done nothing with tax policy to incentivize them to do this. He has not instructed the ministries in the government do do this. He has not even put more women into his own Cabinet.

After more than 3 years in office he has, finally, talked about boosting the number of daycare programs so young married women with small children can go back to work. How long will it take for this to happen, however?

Abe has not done anything to reduce the tax benefits for married women NOT to work. The marriage deduction should be reduced. Otherwise, it pays married women more to stay home than it does to go to work.

He has done nothing about equalizing pay for women. They are still working disproportionately at so called part time, temporary employment where they make much lower salaries.

I am really amazed that even economists of renown, and Stiglitz is certainly one, do not understand what Government Debt actually is. It is not a debt that needs to be repaid from any outside source. It is a debt that can simply be reversed by central bank option of returning the debt sums back to the investors when the debts mature. The debt is deposits from investors stored in the fed accounts and receive interest on them at 6 monthly intervals. It is analogous to your savings account - a bank debt but a depositors asset.No way is it a debt that has to be paid back by future generations. Absolutely no way! No federal government would spend this money - they simply create their own as required. AND even for the past payments on welfare etc, no one is paying for them now and no one ever did.The ignorance is astonishing!!!

Stiglitz :""Alternatively, the government could exchange the debt for non-interest bearing money – the long-feared monetization of government debt. Even if monetary finance was more likely to boost inflation than the exchange of debt for interest-bearing perpetuities, this is hardly an argument against it: it is only an argument for going more slowly. ""So, what is this? A peek out from behind the INET recognition of Chairman Turner's "Overt Money Finanace", so as to advance a modicum of real-economy demand in order to close the GDP - gap.

But, not even a sentence on how (under what authority and what transactions?).

So, somehow we are to understand that the government is transacting its negative (debt) balance and achieving a positive (equity) balance.

The only way I know to do that is to follow a Plan like that researched as a Sovereign Money System (SMS) by KPMG in Iceland.http://internationalmoneyreform.org/blog/2016/09/kpmg-iceland-report-sovereign-money/

KPMG relied heavily on the research of Japanese Monetary Economist Dr. Kaoru Yamaguchi.http://monetary.org/wp-content/uploads/2011/11/DesignOpenMacro.pdf

The annual number of mergers and acquisitions is more than twice what it was in the 1990s. The world needs a healthy dose of competition to keep today’s giants on their toes and to give those in their shadow a chance to grow.But concentration is at its most worrying in America. The share of GDP generated by America’s 100 biggest companies rose from about 33% in 1994 to 46% in 2013. The five largest banks account for 45% of banking assets, up from 25% in 2000Why has no one called to task the Federal Reserve, for creating an environment with its low interest policy that is encouraging this behavior?The whole Fed program is deceptive. It is robbing from the poor fixed income investor to make certain big banks make a profit and big corporations can create monopolies and then increase prices for the” caught in the middle”. Why are the elite economist not taking the FED to task for its harmful policies?Read more

Japan seems to be s symbol of astute planning and execution, instead of being termed as a laggard. In fact Japan has done the best in terms of output growth with a shrinking workforce, something that no other nation could achieve.

Why would a country need to grow if the worker population is shrinking? It is just that banks have a way of blowing the problem out of proportion; it is their problem that if their assets do not grow, they have a staggering liability to deal with. Or is it just that bubbles need the fodder of growth in income perpetually? Read more

Japan's population is shrinking due to the many retirees who make up a comparatively large percentage of the population.

Over time, this affects the economy.

Debt per person, increases.Falling domestic demand.Lower domestic growth.And while Debt-to-GDP may stay the same, it becomes less sustainable as the economy contracts.

Either Japan needs to admit millions of immigrants (which it won't do, this is a matter of historical fact) or it needs to dramatically increase exports, or the government needs to find some other revenue-generator that isn't growth-related.

Japan has already hit the top of the export Bell Curve, and there isn't much room for it to grow it's exports, unless it creates an entire new export market that billions will purchase. What's left to invent and export at scale? Flying cars? The Hydrogen Economy? A home battery in every home on the planet? (All these things are almost certain to happen one day, but Japan needs revenue now, and those are not yet growth industries)

1) Therefore, a large carbon tax, as per Joseph's essay, which could fund government operations *and* the switch to cleaner energy, is one altruistic way to replace diminishing Japanese government revenues. (But after that conversion is complete, then what?)

2) Another way, as I have suggested (please see my comment below) is for Japan to legislate a 40-50% inheritance tax, which would float Japanese government spending for perhaps the next 20 years -- at which point, large revenue accumulations based on the inheritance tax will no longer exist as people adjust to passing on their inheritance to their heirs while they're still alive. (So then what?)

How else to allow continued Japanese government spending at the same high levels as today, as government revenue continues to fall in the face of shrinking population/falling demand/plateaued exports?

It is a conundrum to be sure.

Were I running Japan, I'd plow billions into R&D (cutting other spending, if necessary) and institute a $40/tonne carbon tax, and institute a 40% inheritance tax. Without any delay.

Japan’s GDP grew during its “lost decades” from ¥415 trillion in 1990 to ¥503 trillion in 2010. This growth was achieved even though the number of workers in 1990 was 65.6 million, which peaked at 67.4 million in 1997 and subsequently started to shrink to 62.8 million by 2010.

More taxes and regulations won't increase investment. If anything Japan should incentivize labor saving technologies that will generate revenue streams in necessary industries, like elderly health care. There's certainly global demand in developed countries, and the additional benefits of reducing the need for low skilled migrant emigration will have a positive effect in terms of preserving resources and social stability. Europe doesn't need more people, it needs better efficiency. Japan could provide thought and technological leadership in this area while addressing it's own problems. Read more

Here’s an example. Cyberdyne is a Japanese start-up company that grew out of Professor Yoshiyuki Sankai’s research in the University of Tsukuba. The company is marketing a device that is able to provide extra muscle power for people who are unable to walk unassisted. Perhaps one might describe it as a kind of robotic limb. The company is testing this robotic limb in Japanese hospitals. When fitted to a user’s leg, the robotic limb senses the wearers’ intentions and moves in perfect synchrony with the user’s limb. Surely, this is going to be a boon to millions of people who have difficulty walking?

You can read the full text of why Japan is poised for an economic renaissance here:

http://discussions.ft.com/longroom/tables/equity-strategy/the-missing-fourth-arrow-of-abenomics/#commentsRead more

Joseph Stiglitz starts with two good paragraphs, and then in his third paragraph he goes into the ditch. The prime thing we know about any tax, such as a carbon tax, is that you get less of what you tax. The Japanese are already a quite carbon-efficient economy, and they have much less opportunity to benefit from 'green' investment. The second mistake Mr. Stiglitz makes is to assume that 'green investment' WILL occur and that it will massively benefit the Japanese economy. It is just as likely to be another "boat anchor". Read more

Note the default wave sea 40 to 50 years and oil price shock starting the 1980 one. It could be the Japanese would be well placed investing in green and LNG etc so as to ward of a monster default wave on the global monster debt should the next oil price shock come. PS else it could get ugly ugly ugly on the bond markets. Read more

Zero Perpetuals sounds like a great proposition, PROVIDED.A. They are interventions that finance Public Infrastructure AssetsB. The Obligor must have perpetual life - The State.C. Redemption Funds must be built with cashflows derived from Assets created.D. Cashflows can be derived from Asset use or from Privatizations.E. The Sectors must be specified and part of a designed architecture.

General purpose balance of payments type of licenses for Zero Perpetuals must be eschewed.Because political abuse is a guarantee for perpetual debasement of currency.

The second suggestion is THE PRINTING PRESS.Political abuse renders this option meaningless. Read more

Political abuse is inflicting unemployment on people over an obviously crappy misunderstanding of oil shocks like the NAIRU. Make the government the employer of last resort, there is your buffer stock. It's much easier to transition jobs then get hired from being unemployed. People would be more financially secure knowing they had a fall back. Print money all day long to finance it cause its the only thing that will get us out of stagnation. Read more

Japan is the illustration of the consequences on the obsession for efficiency. The moment Japan went the way of lean production and disregarded the connection to consumers and innovation, Japan lost the current hedge.Cost isn’t a competitive advantage in most of the tradable goods today. The ability to innovate on the other side is proving to be a game changer both for firms and countries. In an economy that is able to generate an absurd amount of cash, what’s the point of focusing your efforts in making more cash on the short –run.Read more

Japan is a fascinating situation and it's difficult to argue against the success of postwar Japan. But Japan could be so much more -- not only in GDP growth and debt reduction -- by increasing the living standards of Japan's citizens.

Broadening-out the economy by adding millions of female workers, will add more discretionary income to families, thereby boosting the contribution to Japan's GDP growth among the bottom four quintiles.

A large carbon tax might be neutral or even better, in that the healthcare costs associated with fossil fuel burning are larger than any purported gains from cheap energy.

The Epstein study by Harvard Medicine informs us that in the United States, coal alone causes up to $500 billion worth of damage annually to the American economy via increased healthcare spending, premature deaths, and infrastructure damage.

Non-coal fossil fuels must have a similar economic cost due to the massive number of vehicles operating in heavily populated regions of the country.

Combining the two costs, it's not difficult to see that each $1 *not spent* at the gas pump *probably* saves $10 in healthcare and infrastructure damage. (Even if it was only a cost savings of 2:1 instead of 10:1 per my above suggestion, it's still a very worthy option, IMHO)

Japan could add a reasonable carbon tax to finance a switch to clean primary energy (electricity and district heating) and to secondary energy (transportation) while creating millions of jobs and adding to R&D spending.

Carbon taxes in the world range anywhere from $15. per tonne of CO2 to the Stanford University claim of $220. per tonne of CO2 emitted.

Why even bother having a $15 per tonne carbon tax -- as it barely pays the administrative costs.

It would be great to have a world standard of $40. per tonne of CO2 -- and have that revenue plowed into cleaner energy -- even if that means burning natural gas instead of coal. Natural gas burns 1 million times cleaner than brown coal (known as Lignite) and ten-thousand times cleaner than pure black coal (which is known as Anthracite)

Burning natural gas instead of Lignite or even Anthracite is a major step forward for nations with large populations and many GigaWatts of energy production through coal-fired power generation.

Because Japan is so advanced they are almost ready for a switch to a Hydrogen economy, today.

And billions of tons of methane ice (Clathrate) sit on the bottom of the world's cold water oceans, slowly dissolving into the water (and then into the atmosphere) and it is free for the taking.

Clathrate is easily turned into pure hydrogen right on board the ships that mine it. (Japan has set up some trial technology to test Clathrate extraction)

All that needs to be done is a small boost to make it economically viable, until those economies of scale kick in.

A moderate carbon tax of $40 per tonne could provide the incentive to put Japan 25 years ahead of the rest of the energy consuming world.

I like the idea of perpetuities in theory, but I worry about them becoming a vehicle for governments to transfer debt and eventually return to the same high Debt-to-GDP levels with no net gain for the economy. In fact, a loss, as that debt must be serviced, and it is money that would get siphoned out of national spending programmes annually. Eternally, is a long time.

After 100% of a government's debt is turned into perpetuities AND it still has a Debt-to-GDP ratio of 248.8% -- then what?

I'd rather see an Inheritance Tax of up to 50% implemented, where the government spends the bulk of it on legislated debt paydown (say at a rate of 5% per year)

Yes, over time the economy will grow and the Debt-to-GDP ratio will fall, thereby lowering the amount the government must pay towards debt paydown each year where growth is recorded. On balance, there are only so many Japanese who are elderly and have substantial wealth tucked away.

If every country legislated a maximum Debt-to-GDP of 50%, then during times of national emergency or war, there is a lot of borrowing opportunity whereby that debt ratio can be ramped-up to 100% of GDP (for example) until such times as the emergency or war is over.

That is responsible economics.

While TPP simply hands responsibility for the PacRim economy, to corporations, which is an abdication of responsibility.

Nothing against corporations here, but they need firm but fair regulation by governments that are nominally controlled by The People.

Corporations cannot be expected to work for the public good, they are in business to make their shareholders wealthy. And good for them! They do a great job of that.

Those entrusted to the public good, are the politicians. We can't allow them to abdicate their responsibilities to us.

PS On Air: The Super Germ Threat

NOV 2, 2016

In the latest edition of PS On
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, Jim O’Neill discusses how to beat antimicrobial resistance, which
threatens millions of lives, with Gavekal Dragonomics’ Anatole Kaletsky
and Leonardo Maisano of
Il Sole 24 Ore.

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